Charted choices : calculating fiscal and economic effects of election manifestos

1. Chartedchoices:calculatingfiscal and economiceffects of election manifestos Johannes Hers Head of Public Finance CPB Budapest 31 January 2014

2. Structure of talk Background onrole of CPB Evaluation of election manifestos Bird’seye view of results Takeaway

3. Formal position of CPB • Department within Ministry of Economic Affairs • Staff of 100-120 large compared to other countries • CPB wants to be a widely trusted source of independent economic analysis • Works for Cabinet and ministries, opposition parties, social partners: • macro-economic forecasts next year and cabinet period • Sustainability analysis government finance • Impact of government agreements and budget packages • Costing of major reforms, cost-benefit analysis, think tank • Evaluation of election manifestos • Strong position based on reputation, not on legal position • De facto independence, requires vigilance and reticence

4. Election cycle • Mid-term economic forecast incl sustainability of public finance • Advisory Group on Fiscal Policy gives advice on budgetary goals • Publication of CPB analysis of election manifestos • Elections • Negotiations on new coalition agreement • Publication of CPB analysis of coalition agreement • Start: about 5-6 months prior to elections

5. Structure of talk Background onrole of CP Evaluation of election manifestos Bird’seye view of results Takeaway

6. Evaluation election manifestos: merits • On request of political parties • 3 parties participated in 1986 (first time) • 10 parties participated in last evaluation in 2012 • Merits: • Same underlying economic scenario • Evaluation by identical standards • Makes programs comparable • Improves concreteness in proposals • Check on practical and juridical feasibility • Facilitates subsequent coalition negotiations

7. Evaluation election manifestos: drawbacks • Objections / critics: • Constrains political debate (e.g. juridical feasibility) • Bias in debate to proposals that are easily evaluated • e.g. institutional reform in health care not effective • Not all trade offs are visible • e.g. long term purchasing power effects • Too detailed, lot of work for parties and CPB

8. Rules of the game: transparent and accountable • communicate publicly at start about "rules" (e.g limits on unspecified spending cuts, laffer curve limits on large increases of tax rates etc) • be transparent about models used and key assumptions • communicate exclusively and bilaterally with parties: NEVER share party X's plan with party Y • CPB does not check if measures that parties hand in are part of their election manifesto: this is for the media • check during the process if you understand proposals by sending back a neutral refrasing of it [eliminate propaganda texts] • reduce gaming: parties see the scores of other parties (ie their relative score) for the first time at publication day

9. Structure of talk Background onrole of CPB Evaluation of election manifestos Bird’seye view of results Takeaway

10. Bird’seye view of results 2012 Effects of manifestos on 5 main topics: • Policymeasures: ex ante fiscalcosts and benefits • Medium term macro-economicoutcomes (gdp, unemployment, purchasing power, ex post fiscalbalance). • Structurallabourmarketeffects: long term employment • Sustainability of governmentbalance • Special topics (5 in 2012): energy/climate, education, innovation, mobility, environment • Start from scratch: fiscaleffects are the first and crucial step • If more: important to show the crucialtradeoffs

11. Example of outcomes and key trade off's

12. 1. Ex ante fiscaleffectspolicymeasures Calculation of direct fiscalcostsand benefitsbasedon: • Information in the budget and of ministries (CPB checks) • CPB models: model forincometax and social premiums, model forothertaxes, model forwagecosts public sector etc • CPB expert opiniononvarious topics • No free lunches e.g.: • Hard limit onsize of unspecified budget cuts: practical and juridicalfeasibility • Wagefreeze public sector onlytemporary effect: onelabourmarket • Onlypolicymeasuresstarting in cabinetperiod: implementation must becredible Crucial: no free lunches and consistencybetweenparties

13. Otherinstrumentsused: • Policymeasures: ex ante fiscalcosts and benefits [CPB tax-benefit calculator etc] • Medium term macro-economicoutcomeswith CPB macroeconomic model [Saffier II] • Structurallabourmarketeffectswith CPB generalequilibrium model [Mimic] • Sustainability of governmentbalancewith CPB dynamic GE model with overlapping generations [Gamma] • Special topics withvariousspecific models http://www.cpb.nl/en/models

14. Looking back at exercise in 2012 • General conclusion: • unanimous on value of the exercise, especially on ex ante fiscal costing of manifestos • However: • Size and amount of detail not manageable anymore • E.g ca 3000 policy measures analyzed, 60 fte 3 months • Lot of coordination internally and with parties • More and more parties as result of political fragmentation • Debate too focused on measures which “score” • Especially in special topics, new measures without evidence base for effects are excluded •  Conclusion: back to basics, skip the special topics

15. Structure of talk Background onrole of CPB Evaluation of election manifestos Bird’seye view of results Takeaway

16. Take away for the evaluator: • A reputation of quality and neutrality is crucial for trust of parties; building this reputation takes time and sound analysis • Be transparent and accountable about process and content • Starting from scratch first step is direct costing of policy measures • Very difficult without information and knowledge of ministries • Where possible develop your own instruments to calculate costs and benefits of policy measures (e.g. models for tax measures) • This is doable with relatively small staff of experts (5-6 persons) • If more output (models!): show crucial trade offs • Supply side (incentives) vs demand side • Fiscal effects vs purchasing power • Short vs long run effects • In order to do this you'll need models and experts • Takes a lot of effort and institutional knowledge to do it right

17. Take away for parties • Trust: helps to demonstrate reliability / quality of your plans • “approved by IFI so no empty promises” • And: if critical mass asks for analysis, lacking this approval is disadvantageous in the political debate • Concreteness and accountability: • demonstrate to the voter that your program can be developed into a viable government program • facilitates quick (coalition) negotiations and implementation after elections • Comparability: quantifies your choices in terms of fundamental trade offs • E.g. fiscal consolidation versus purchasing power • E.g. incentives for efficiency vs income equality • Takes a lot of effort and institutional knowledge to do it right

18. More on: http://www.cpb.nl/en/publication/charted-choices-2013-2017

19. Evaluationelection manifestos: the process 0. Regularcontactsoutside “electionseason” • Kick off document containing information for parties [week 1] • Kick off meeting with briefing onrules of conduct [week 1] • Parties hand in theirconcrete policyproposals [week 2] • CPB sendsparties ex ante fiscaleffects of proposals [week 6] • Parties hand in theiramendments of policyproposals [week 8] • CPB sendspartiesmacroeconomic and otheroutcomes [week 11] • Parties hand in last (small) adjustments [week 12] • CPB sendspartiesdraft reports [week 13]

20. 1. Ex ante budgetaryoutcomes: expenditure